1999 (9) TMI 878 - AT - Central Excise

Shell sand - Manufacture - Marketability - Demand - Limitation - Valuation - Cost of production - Modvat/Cenvat - Penalty - Precedent - Judicial precedent - Manufacture

Issues Involved:
1. Whether the process of coating shell resin on sand to make "shell sand" amounts to manufacture under Section 2(f) of the Central Excises and Salt Act (CESA).
2. Whether shell sand is marketable and hence excisable.
3. Whether the demand of duty for the period prior to six months preceding the show cause notice is time-barred.
4. Whether the appellants are entitled to Modvat credit for the duty paid on resin and other inputs used in the manufacture of shell sand.
5. Whether the penalty imposed on the appellants is justifiable.
6. Whether the valuation of goods by the Department was correct.

Issue-wise Detailed Analysis:

1. Manufacture of Shell Sand:
The central issue in these appeals is whether the process of coating shell resin on sand to make "shell sand" amounts to manufacture under Section 2(f) of the CESA. The appellants argued that this process did not result in a new commodity with a distinct name, character, or use, and hence did not constitute manufacture. However, the Tribunal upheld the lower authority's decision, referencing the TELCO case, which established that resin-coated sand is a commercial and marketable product, thus falling under the definition of manufacture. The Tribunal concluded that the process carried out by the appellants amounted to manufacture under Section 2(f) of the CESA.

2. Marketability and Excisability of Shell Sand:
The appellants contended that shell sand was not marketed or marketable. The Tribunal, however, observed that the appellants had conceded the significant shelf-life of resin-coated sand before the lower authority, which justified the finding that the goods were marketable. Consequently, the Tribunal held that resin-coated sand produced by the appellants was excisable and subject to Central Excise duty.

3. Limitation on Duty Demand:
The appellants argued that the demand for duty for the period prior to six months preceding the show cause notice was time-barred, as the Department was aware of their manufacturing process since 1977. The Tribunal agreed with the appellants, noting that there was no evidence of willful suppression of information with intent to evade duty. The mere non-mention of the goods in the classification lists did not constitute suppression. Therefore, the demand for the period prior to six months preceding the show cause notice was held to be barred by limitation.

4. Modvat Credit Entitlement:
The appellants claimed Modvat credit for the duty paid on resin and other inputs used in the manufacture of shell sand. The lower authority had disallowed this credit due to non-filing of a declaration under Rule 57G. The Tribunal, relying on the TELCO case and other precedents, held that Modvat credit should not be denied on the mere ground of non-filing of a declaration. Thus, the appellants were entitled to Modvat credit for the duty paid on the resin used for producing resin-coated sand.

5. Justifiability of Penalty:
Given the Tribunal's finding on the issue of limitation, it also held that the penalty imposed on the appellants was not sustainable. There was no sufficient evidence to conclude that the appellants contravened provisions of law with intent to evade duty. Therefore, the order imposing a penalty was set aside.

6. Valuation of Goods:
The appellants challenged the valuation of goods by the Department, arguing that it was incorrect due to double counting and other errors. The Tribunal found that the lower authority had not properly applied the provisions of Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975, and Section 4(1)(b) of the CESA. The valuation did not consider the duty paid on inputs used for producing shell sand. Consequently, the Tribunal found the impugned order to be vitiated by misvaluation and set it aside.

Conclusion:
The Tribunal set aside the impugned order and allowed the appeals by remand. The lower authority was directed to pass fresh orders in accordance with the law and the Tribunal's findings and observations. The appeals were disposed of accordingly.

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